Brazil: From Bad to Worse?

August 3, 2015 3 minute read

Brazil: From Bad to Worse?

Brazil: From Bad to Worse?

Recently, Standard & Poor’s indicated that it is considering removing Brazil’s coveted investment-grade credit status on its long-term sovereign debt. In the company’s statement on Tuesday, it has revised the outlook on Brazil’s rating from stable to negative, citing both political and economic factors. If the rating is lowered, there may be a major unloading of Brazilian debt in global markets.

S&P had already cut Brazil’s rating to BBB- in March 2014, citing the country’s poor growth, climbing debt levels and the growing corruption scandals involving state-run companies. Brazil first gained investment grade status in 2008, with annual growth projections of 4.5% but the country now faces its worst downturn in 25 years. Multiple sources estimate that Brazil’s economy will contract by at least 1.7% in 2015 and stagnate through 2016.

Additionally, Brazil’s central bank raised the base rate of interest by 50 basis points to 14.25% on Wednesday 29th July. Partly due to the government’s wavering over helping to reduce inflationary pressures. This can be inferred from the lowering of its fiscal savings targets for 2015 through 2017, meaning less aggressive debt reduction. S&P and others saw this as a loss of fiscal credibility in respect of a soaring budget deficit, which itself remains a cause of the threat of the downgrade. Despite having the highest base rate of major economies, Brazil’s inflation remains problematically high in the year to June at 9.25%, and well over the target midpoint of 4.5%. As a result, high inflation has contributed to Brazil’s falling exchange rate and increasing import prices.

But Brazil is running an increasing current account deficit in spite of this. Largely this is down to China’s recent slowdown, as the country was a major Brazilian export market, but generally low commodity prices have also had an effect. In order to protect the country’s investment grade status, President Rousseff has aimed to introduce austerity measures amid the increasing debt. However, an already shrinking economy has depressed tax revenues and made deficit reduction difficult. The measures themselves have also been watered down as a result of congressional resistance due to an accelerating unemployment rate.

The difficulty in passing laws is not President Rousseff’s primary concern though, as she is currently threatened with impeachment. This is a consequence of campaign finance and government accounting irregularities during her first term and also, the scandal at Petrobras, a company she chaired before 2011. The threat is also damaging the economy as it seems to have led to a fall in both business and consumer confidence.

The alleged corruption stems from engineering and construction companies gaining lucrative Petrobras contracts by bribing corrupt officials. Some state that this was then used as kickback money, funding President Rousseff’s election campaigns. While most officials being investigated are from the governing coalition, Rousseff herself is not implicated.

Impeachment remains unlikely however, as obtaining proof of the kickback money would require an alliance of the main opposition party and Rousseff’s Workers’ Party’s main ally. The party has also vowed to stick with President Rousseff for now, but new nationwide protests have been called for August 16th. With public approval of the current government as low as 7.7% in one recent poll, the governing coalition could be forced to remove the president from power, sparking a damaging political crisis when Brazil’s economy could do without.

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